The effect of taxes and benefits reforms on poverty and inequality in Latvia

Abstract

Despite its steady reduction since 2011, the share of people at risk of poverty or social exclusion in Latvia remains high compared to other EU Member States. A large labour tax reform, including a move towards a progressive tax rate schedule, a reduction of the standard personal income tax rate and an increase of the basic (tax-free) allowance, was adopted in the summer 2017. A reform of the social assistance scheme has been under discussion for several years. Simulations based on the EUROMOD and the OECD Tax-Benefit model are used to assess the impact of these taxes and benefits reforms on poverty, inequality, and incentives to work over the horizon 2016-2020.
Overall, the results indicate that the tax reform will benefit households in all income deciles, albeit at a sizeable budgetary cost and with a relatively limited impact on poverty and inequality. If pursued, the reform of the social assistance scheme offers an opportunity to support the incomes of the poorest households and bring inequality and poverty in Latvia more in line with the EU average. Through adjustments in the design of the benefits scheme, the negative impact of raising the adequacy of benefits on incentives to take up work can be mitigated.
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